Stablecoins Are Ideal for Managing Crypto Volatility

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Many potential investors in cryptocurrency have been watching the rapid ups and downs of Bitcoin, Ethereum, and the rest. To people who are still sitting on the sidelines, this volatility is worrying.

There is no doubt that crypto has disrupted the way many investors think about money. As prices can and do change quite drastically from one moment to the next, traditional investors are giving crypto a wide berth.

For those who wish to take advantage of the obvious investment benefits but do not feel comfortable with crypto, stablecoins may be the better alternative. Stablecoins are crypto, but, in most cases are backed by a fiat currency.

What are Stablecoins?

Stablecoins are digital currency. However, unlike alternatives, stablecoins are backed by assets such as gold or a national currency. The principal types include those that are fiat-backed, cryptocurrency-backed, and commodity-backed.

Unlike Bitcoin, stablecoins are designed to hold a fixed value, a value that is often pegged to government-backed securities such as dollars. Crypto, on the other hand, is a new, rapidly evolving asset class that is subject to extreme volatility which often results in rapid changes in their value.

As stablecoins are pegged to assets such as the U.S. dollar, price movement is managed outside of crypto space, thus they reduce financial risk. Where cryptocurrencies are very sensitive to events in the market, stablecoins are far less influenced by market conditions.

Fiat-backed Stablecoins

Tether is a good example of a fiat-backed stablecoin. Tether (USDT) blazed the way as the first U.S. dollar-backed stablecoin, and today it has the largest market cap and is, by far, the most widely used. USDC is another U.S. dollar-backed stablecoin, having been launched in 2018 by, amongst others, Coinbase. Both these stablecoins are centralized, meaning they are held by an exchange or an entity. USDC is managed by Coinbase as well as Circle.

There is a risk associated with central authority stablecoins, and that is trusting they can hold on to a supply of dollars that equals the supply of stablecoin. In itself, this goes against the entire concept of decentralization.

Crypto-backed Stablecoins

DAI is a typical crypto-backed stablecoin. The value of DAI is backed and stabilized through a system of collateralized debt positions as well as an autonomous feedback mechanism and incentivized external actors.

The goal of this particular digital asset is to maintain its value with the United States dollar. DAI is maintained by the Etherum blockchain network, it allows people to employ their Etherum assets to generate DAI without the need for an intermediary. No one person or entity controls the blockchain, anyone can help maintain it.

Commodity-backed Stablecoins

Commodity-backed stablecoins are backed by either precious metals such as gold, or oil. Well-known stablecoins in this particular category include Tether Gold as well as Paxos Gold. Investors tend to purchase these assets for capital appreciation as gold and oil tend to increase in value over time.

Using Stablecoins

Stablecoins are the ideal payment system for transferring money globally as they are quick and cheap. Stablecoins are a very fast way to move deposits or withdrawals between fiat currencies and crypto exchanges.

According to Nemil Dalal, head of crypto at Coinbase, payments are perhaps the most powerful use of stablecoins.

Dalal goes on to say that, with Stablecoins users can send money anywhere, at any time and the transfer takes only seconds. Given the fact they are a stable form of currency; they lend themselves to an easy payment flow. Companies are beginning to adopt this method of sending money to their employees.

Many holders of crypto move their money into stablecoins when they observe significant movements in crypto prices. Once the market has stabilized, they can quickly move back into crypto.

Many investors are hesitant to deal with volatility. These people can wait for the market to calm down, and at the same time, they can continue to buy stablecoins with fiat money. In this way, the value does not change as they wait to move it into one of the many cryptocurrencies.

A further advantage of stablecoins is the ease of use. Stablecoins are liquid and tradeable, they are easy to convert into other cryptocurrencies or a fiat currency on demand.

Risk Disclaimer

ChesWorkShop commits to presenting fair and reliable information on subjects including cryptocurrency, finance, trading, and stocks. However, we do not have the capacity to offer financial guidance, advocating instead for users to conduct their own diligent research.

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